4QQMN136 Introduction to Microeconomics and 4QQMN146 Introduction to Macroeconomics

2020

Question 1:

Explain why employers pay a lower efficiency wage when unemployment is high. How would the efficiency wage change in an economy if it became      easier to monitor the work that employees did? Other than to incentivise      workers to put in effort, can you think of any other reasons why wages might be higher when unemployment is low (i.e. an upward-sloping wage-setting   curve)?

Question 2:

To support the economy against a recession triggered by the Coronavirus, the government is considering increasing public spending. Suppose the               government decides to finance the additional spending with new taxes, and to increase taxes by the same amount as public spending. A critic to the             government objects saying that if public spending and taxes increase by the   same amount, no increase in GDP should be expected: what the government gives to the economy is taken back via taxes.

Use the model of aggregate demand and aggregate supply to study if the proposed economic policy could increase GDP by computing the fiscal  multipliers.

a) Start from the model C + I + G + NX = Y with C the aggregate level of consumption, I the aggregate level of investment, G the level of fiscal   spending, NX the net experts and Y the level of GDP. Assume NX = 0 and assume that C = c0 + c1(Y-T), with T the level of taxes. Interpret the economic intuition behind the function for consumption. What is  c1? (5 marks)

b) Derive the equilibrium level of GDP associated with this model. Study  by how much Y increases when G increases under the assumption T=G. Does your model predict that Y will be affected by the government       intervention? Why? (10 marks)

c) Now assume that NX = X – mY, where X represents total exports and m represents the marginal propensity to import. How does your answer to question b) change? Why? (10 marks)

Question 3:

a)  Suppose you walk into a large supermarket at 2 am with a friend. Your  friend says, "I can't believe that these stores stay open all night. Only one out of fifteen checkout lines is open. There can't be more than ten          shoppers in this store. Itjust doesn't make any sense for this store to be   open all night." What conditions must be true for it to be to the              advantage of the supermarket to stay open all night? (13 marks)

b) Your friend has a large garden and grows fresh fruit and vegetables to be  sold at a local "farmer's market." Last year your friend was the only worker  in the garden, without any additional workers. However, this year your  friend hired a worker and production more than doubled. He comments “Next summer, I think I'll hire another two workers (so total workers  including myself would go up from 2 to 4) and my output should again more than double". Is it likely that he could hire more workersand always continue to reap greater than proportional increases in production? Why?  (12 marks)